A double whammy of tax hikes for buy-to-let investors is not the only potential headache for aspiring landlords, warn financial advisers.

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The chancellor has made life more difficult for buy-to-let investors through a double whammy of tax hikes, but it is not the only potential headache for aspiring landlords, financial advisers have warned.

‘It’s been a pretty brutal attack on buy-to-let by the chancellor,’ said Jason Witcombe, a director of London-based Evolve Financial Planning. ‘Lots of our clients have buy-to-let properties, although it’s not something that I’ve recommended as I’ve seen quite a lot of people lose money in this area.’

Witcombe said many investors had made money from buy-to-let purely because they happened to live in an area where prices had risen.

‘We can sometimes become fixated with London and the South East, whereas other areas of the country haven’t experienced anything like the same rises,’ he said. ‘I always advise clients not to get sucked into the hype that property prices can only go one way.’

Justin Modray, director of Buckinghamshire-based Candid Financial Advice, said the changing environment and increased transaction costs were a cause for concern, but pointed out the sector had done well for investors since the mid-1990s.

‘There’s no doubt it has been a particularly lucrative investment over the last 20 years for many people, primarily due to the meteoric rise in residential property prices in the UK,’ he said. ‘But going forwards there are some question marks.’

He said the first was property valuations. ‘Prices seem to keep rising but when you compare these increases with average earnings it’s hard to see how this can continue over the next five to 10 years – although we could have said the same thing a decade ago,’ he said.

Rate hike fears

Another concern for property investors is the looming prospect of rising interest rates.

‘This could be a double whammy for buy-to-let investors as rising rates would be a leveller on house prices, while those borrowing money to invest in a buy-to-let property will see their costs increase,’ said Modray.

If the chancellor’s recent announcement is the start of an increasing wave of taxation pressure on the buy-to-let market this could be disastrous, said Andrew Merricks, head of research at Brighton-based Skerritt Consultants.

‘The more unattractive it becomes from a cost point of view the more people will look to get out,’ he said. ‘If there’s a reversal of the tidal wave of people that went into it, there will suddenly be a lot of property available and investors will be selling into a falling market. This means you won’t get your capital back if you bought at the wrong time.’

Merricks said he also had concerns over liquidity. ‘You have to be able to turn any investment into cash at very short notice because if things aren’t working out you want to change your mind without penalty and costs,’ he said.

Troublesome tenants

While commercial property is a key part of many portfolios, principally exposure to specialist funds that buy and manage a wide variety of office, industrial and retail space, buy-to-let poses more challenges.

Carl Melvin, chief executive at Paisley-based Affluent Financial Planning, advises clients to give buy-to-let a wide berth. He is well placed to judge as he has been an investor in this area for the past decade.

‘When you work out how much everything costs to set up and manage, particularly with all the obligations you have as a landlord, the return on your investment is not as compelling as it initially appears to be,’ he said.

He said the most significant negative was the lack of control over the outcome. ‘If the tenant loses their job or experiences financial difficulties, their problem becomes your problem,’ he said. ‘If they don’t pay their rent it’s a difficult situation to resolve through the courts.’

There are also unforeseen expenses. ‘If a significant repair needs to be carried out to the building this can wipe out your profit from the investment,’ he said. ‘If nothing bad happens and people pay their rent it’s wonderful, but life isn’t like that.’

Melvin believes a lot depends on a person’s reasons for entering the buy-to-let sector. If they see it as a generator of longer-term capital growth it can make sense, but if they want it to generate an income things are slightly different.

‘If you rely on the income, or are retired, you don’t want it exposed to that kind of risk,’ he said. ‘You want a predictable, reliable income stream, and my concern with buy-to-let is that when it goes well it’s wonderful but when it goes badly it’s terrible.’

It will be interesting to see what happens if landlords start to sell. I have always had the feeling that outside major cities, people don't really want a flat but prefer a house. However flats have been convenient for landlords and short-term tenants alike. Also, with so many young people unable to buy a property, if they eventually can afford to buy they will be of the age to think of starting a family and wanting a house. So maybe the price of flats will go down and small houses will do better.

I think as citizens we are being cornered. If you are employed by the state, you can not no longer control your retirement. The retirement age is now 68 and I am quite sure in a few years time, the government will increase it to 70. If you are a self employed wanting to prepare your retirement by investing in property, you are hammered.

There seems to be no way out for one to gain financial independence unless you are Bill Gate or Mark Zuckenberg.

The sad thing is, it is a conservative government that is clobbering people who are working hard, using their own money to invest in properties and provide a service to the rental market.

I believe that Andrew Merricks is absolutely correct in his assumptions. I further believe there is going to be tsunami of BTL property coming onto the market in the next few years even though many landlords will switch their portfolios into a Limited Company.

Landlords will find in most areas rents will not be forced to rise as many hundreds of thousands of tenants will become FTBs and then use their "rent a room relief" tax allowance to provide accommodation for tens of thousand more tenants in order to assist them with their mortgage costs. FTBs will be the new generation of landlords!

The PM, Chancellor and the Governor of the Bank of England have all "played a blinder" over reducing the attraction of the BTL sector thereby reducing the risk to the economy in addition to assisting generations of aspiring FTBs.

My word you lot are in a parallel universe. Tenants vote Labour, owners vote Tory - SIMPLE, you are fighting the tide, so stop being King Cnuts and sell now. Or rebel and vote Labour (ha ha).

Yes there will be a stampede of properties onto the market and the price will have to drop to a price affordable to the next level of buyers. I very seriously doubt professional companies will by broken terraces in Kent and Cumbria - they will BUILD to rent, totally different market and hopefully the big ones will want REIT status. If leveraged landlords start incorporating expect to be CRUSHED in the next budget or Autumn statement.

BTL is bad for Britain, it's bad for families, bad for young people, bad for the banks, bad for financial stability, bad for the economy and it still has stupid IO loans which are a weapon of financial mass destruction, allowing you to get us all in such a mess in the first place. Be gone and don't trouble us all again.

Renting a room in your own house is not the same as evicting a family from a house and renting it back to them.

Property is not a business, it is an investment, HMRC have just clarified.

As to the future of IO and BTL, well it seems BCBS are going to put the stake through the heart, enjoy! http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/12043703/Global-regulators-join-crackdown-on-buy-to-let.html

I'm retired and would like to get out of BTL, but I can't afford to. eg. I bought a 2 bed mid terrace in 2007 for £80,000. They are now selling for £50,000. Who will pay £80,000 for an old property when you can buy a new 2 bed house for £69,950. I live in the north east where house prices are not rising, but they have stabilized. They say they might start going up soon.

"Landlords will find in most areas rents will not be forced to rise as many hundreds of thousands of tenants will become FTBs..." C CloyDec 19, 2015 at 10:11

Assuming that they can afford to. The point of intervention, we are told, is to prevent a boom from turning into a bust; i.e. to stop the buy to let debt from turning bad much like the sub prime debt of yesteryear and depressing prices as landlords exit en masse or are repossessed.

Discouraging landlords from investing won't ensure that there are more properties to purchase, just that there are fewer to rent. Housing options for the younger generation will narrow. Either that, or prices will have fallen, and the government will have shot themselves in the foot by causing prices to fall as a result of the actions they took to prevent that from happening.